No, rent control does not work — it actually benefits the rich and hurts the poor

A
bargain, steps from the tube and local parks! (Zone
5).REUTERS/Tyrone
Siu

About 10 years ago, I worked at a glossy magazine in Midtown New
York which employed a famous author as one of its senior
writers. He came into the office one day, beaming from
ear-to-ear. He had just signed an agreement to move into a
rent-controlled apartment. For the next several years — as
long as he wanted to live there — he would be paying hundreds of
dollars less than the market rate for his rent.

Rent-control, which caps rent increases, is intended to benefit
the poor — people who can't afford market prices for their
apartments in expensive cities like London, New York, and San
Francisco.

The author wasn't poor, of course. He graduated from Harvard
and was a well-paid freelancer for New York magazine, Vanity Fair
and the New Yorker. He was the very definition of the media elite
that rules Manhattan.

He was successful in his career because he seemed to know
everyone in the city — which is how he got his hands on a
rent-controlled flat.

It then struck me that none of the people I knew in New
York who lived in rent-controlled apartments were poor. (I'm
using the term "rent-controlled" to include "rent-stabilized,"
which is a similar but less extreme New York City policy.) They
were simply people who knew someone (who knew someone) who hooked
them up with a sweet deal.

London, of course, already has a form of rent control, via its
"social housing" policy. Developers who want to build luxury
flats can get their plans approved if they set aside a certain
percentage of those units to be sold at below-market rates. It
functions just like rent control in that it sets aside a defined
amount of housing supply specifically for people who pay
non-market rates.

It's the same in New York and San Francisco. Everywhere that
has rent control, has high rents.

Turns out this is not a coincidence.

Rent control actually drives up the price of most rents by
restricting the supply of new units onto the market. While
some renters may get a bargain, most people
never get access to rent-controlled flats. Once people move into
a rent-controlled place, they are incentivised to never move out,
because it is so cheap.

The classic rent-control lease in New York
lasts indefinitely, so once someone is in,
they can stay for the rest of their life. (In New York, it's
commonplace inside rent controlled apartments to see cookers,
radiators, and kitchen fittings that date back to the 1960s
because landlords just won't replace them, and tenants won't move
out.) People can even sub-let their apartments or pass them on to
next-of-kin which is why personal connections in the market are
so important.

That removes a huge chunk of available housing from the market.
Demand for new housing remains the same, but now the
supply of new housing is reduced. So prices everywhere
else go up.

Under rent control, landlords and property owners know not to
create any new housing units that fall under rent control,
because they won't be able to maximise their investment. So they
build as few units as possible in that category.

Every spade in the ground for a new luxury building is a
shrinkage in the supply of new housing for regular people.

None of this stops the luxury real-estate developers, however. A
luxury real estate financier in London told me recently that his
clients love London's "social housing" rules because his
developers are able to either fake the paperwork necessary to get
around it or make one-off cash payments to the local council in
lieu of building social units.

The result is that developers build only high-end units for the
luxury market, because there is no money in creating affordable
housing if landlords can never raise the rent. Developers get
rich. And rich people get all the best new housing.

In turn, this magnifies an already bad situation for the
not-rich: By definition, every luxury unit built is a more modest
unit not being built.

The Financial Times has a nice theoretical chart illustrating how
this happens:

The line P* represents the price where demand completely meets
supply. P** is the price where demand completely meets supply
at an artificially enforced lower level. Anyone who can
get a house at P** is lucky. But the supply of available units
there is now much lower. All the people who fall into the gap
between P** and P* are those who would normally have been able to
get place to live but now cannot. (Those willing to pay more can
live wherever they want — because there is excess supply at high
price points in the top-right section of the chart.)

That's the theory, anyway. Does it bear out in real life?

Yes. Here is a chart, also from the FT, of UK rent prices versus
inflation:

That is happening because the supply of new housing has fallen by
half over the last 20 years. Here are the historic data from the
UK's Department of Communities and Local Government on permanent
dwellings completed by year:

ONS

(Government house building is generally only 5-10% of the total
supply, and is omitted from this chart. But it wouldn't make much
difference.)

The UK used to build more than 200,000 new homes a year. Now we
build only about 100,000. Housing supply is the real factor in
setting rent prices.

It is into this environment that Scotland, Ireland, Seattle, San
Diego and Jeremy Corbyn are proposing rent control policies that
will by definition freeze tenants into long-term occupancies of a
minority of cheap housing that would otherwise naturally cycle on
and off the market.

The rest of us — the majority — will be screwed.

Rent control "ruins people's lives."

Which reminds me of the other anecdote I remember about rent
control in New York 10 years ago.

At that time, during the property bubble, I met a real estate
appraiser at a party. His job was to visit apartments that were
coming up for sale and assess whether the price being paid was
fair. I suggested to him that prices in New York were so high
that it would be great if the city could somehow create more
rent-controlled apartments.

"I'd never live in a rent control unit," he told me. Why not? I
asked. It is every New Yorker's dream to move into a nice place
in Manhattan and pay hundreds less than your neighbours!

He told me that in his job, he frequently had to deal with
apartments and tenants that re-entered the free market after
years as rent-controlled units. The problem was that it's
rent control, not ownership control.

Tenants aren't guaranteed their units forever and eventually all
units age out of the rent control system, sometimes when
buildings are sold or when the tenant on the lease moves out. At
that point, these tenants are ejected back onto the free market —
where rents are now hundreds or thousands of dollars higher than
they're used to paying. They're totally unequipped to deal with
"normal" housing prices, and they have zero equity in the housing
they were living in.